“Many unhappy returns”

The article goes into detail regarding the fluctuations of prices regarding equities, bonds and residential property. The Deutsche Bank analyzed the average valuation of the three assets of 15 countries. However; it concluded that the priciest of the three assets were bonds, coupled with low inflation and the central bank purchases of government bonds lead to very low nominal yields.

With bonds now yielding essentially 2.2%, this means that future nominal returns are likely to be even lower. Even though equities may be able to deliver a normal “risk premium” over bonds with around four percentage points, that would still end up becoming 6-7% ( which is not very high). In terms of the overall portfolio it would be damaging in the sense that the optimum target wouldnt be reached.

In terms of the public sector, it would need to accept the impact of future lower returns. It would have two choices essentially, either employers contribute more or the funds could be used to cut benefits. Which may not be optimal.

In terms of the American pension funds, anyone looking into being secure for their retirement, has the option of saving more, since the average pension scheme is only 10% of employee salary. This by far would not be the optimal return for future endeavours.

Article link:

http://www.economist.com/news/finance-and-economics/21664152-high-valuations-should-give-investors-pause-many-unhappy-returns